Cryptoeconomics - The Next Generation Technology

Is Cryptoeconomics the next generation of technology? 

Well, have you heard before? 

Let your answer be a Yes or No. Hope this article will be helping you in finding out the same!

For the term cryptocurrency and blockchain application, do refer more, so that it gives you a better understanding of Cryptoeconomics.

What is Cryptoeconomics?

Cryptoeconomics is simply a combination of both cryptography and economics.

Or in other words, it could be described as the usage of economics (like incentives) and cryptography (encryption mechanisms) in designing a secure network system with a set of predefined properties.

The addition of the cryptography aspect into the system is what allows the interactions between the peers in the network to be secured.

And the addition of economic incentives encourages all the actors to behave in a way that holds the wanted properties and enables the network to operate smoothly and prosper over time.

Creating efficient cryptoeconomics makes a decentralized network system to prevail over the malicious attacks trying to disrupt the network. 

When the first Bitcoin blockchain was developed by the founder, Satoshi Nakamoto, he designed and implemented a Proof of Work (PoW) protocol to the system. And this was done primarily to secure the network through cryptography and using an incentive system for settlement.

Basically, Proof of Work is what allows transactions on the blockchain to take place. Through this, members of the network, called miners, prove that a specified amount of work has been completed in order to validate the transactions.

What is the difference between the Proof of Work and Proof of Stake? 

Proof Of Work

Proof of Work can be explained as the general agreement by which the new blocks get approved and added to the system when the miners “mine”! 

Miners will be needing high computing power to sole out the cryptographic puzzles to satisfy a difficulty level. This is one of the innovative and creative approaches introduced in the area of blockchain technology.

Earlier the decentralized digital currency systems used to fail because of a problem called the “Byzantine Generals Problem”. The proof of the work consensus system provided a solution to this problem.

Why is Cryptoeconomics so important for the decentralized Blockchain networks?

Cryptoeconomics allows the different parties who do not know one another to reach an agreement about the state of a blockchain. 

The decentralized blockchain networks like Bitcoin and Ethereum simply cannot work without the application of cryptoeconomic applications. 

And hence, it is the elements of cryptoeconomics as mentioned above, the cryptography and economics, that allow the creation of decentralized networks and the ability of these networks to reach out on an agreement, that is without the need to rely on a trusted central authority.

What are the challenges of building incentive mechanisms?

Building incentive mechanisms into a decentralized system is really a complex task. 

It's because cryptoeconomics attempts to combine the technology implemented rules with the unpredictable behaviors of human nature.

Designing the cryptoeconomic elements of a network should have the characteristics to be designed from the beginning itself.

It involves designing predefined rules based on all the possible ways in which human beings could interact with the system. 

In the same way, designing good rules requires understanding and predicting the way humans will interact within a decentralized system.

And this is what makes cryptocurrencies so hard.

This is the reason why cryptoeconomics is very much essential. If rules are not defined correctly, a decentralized system is bound to collapse and fail. This is where a proper mechanism design comes in.  

Mechanism design takes care of all the formalities required within a system towards desired objectives.

Role of tokens in a Blockchain protocol

A token is a primary tool that helps to control a protocol’s micro-economy. 

A well designed and implemented system would take care of the incentives and distribution of tokens within the respective network of participants.

And when such tokenized incentives are aligned accurately a decentralized system prospers.

Cryptoeconomics helps us to create systems where those who protect the rules of the game receive rewards, while those attempting to break the rules have to face the financial walls disincentivize their behavior and hence safeguard the network.

For example, in the case of Bitcoin, the miners who are honest receive block rewards, whereas those who are dishonest end up wasting their computing power, energy, and money making it an expensive, unprofitable, and fruitless endeavor.

One of the major things to take care of is that tokens are not just a tool for an ICO, but an important part of the blockchain system’s ability to function. 

Tokens should be an integral part of the network in which they exist to have any value.

The benefit of a token is dependent on what secures and governs the behavior of the users within that network. And the failure to achieve this ultimately results in the failure of the system. 

And then blockchain networks that use the cryptoeconomic principles to operate can offer new and innovative decentralized systems and thus promote all stakeholders to act in the interest of the network.

Conclusion

From above, one can easily conclude that Cryptoeconomics is undoubtedly the Next Generation Technology! Its importance in the decentralized digital cash systems has to be noted. 

And, if you are planning to build your own Blockchain applications, make sure you create a decent first impression. Hence, the user interfaces of your Blockchain applications should be attractive and engaging.

Consult a leading UX Design Agency, and they might be able to help you in achieving the same!